The Inventor of the 401(k) Thinks It Has Gone Awry

By

Sarah Max

Nov. 16, 2018 7:05 p.m. ET

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Ted Benna
Photography by Nathan Bajar

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Ted Benna is widely regarded as the father of the 401(k), which was born 40 years ago with the passage of the Revenue Act of 1978. The former benefits consultant didn’t write the 869-word section of tax code that paved the way for the plan. Nor did he set out to reimagine how American’s saved for retirement. Yet through what he calls a political “fluke” and his own interest in helping a client, Benna played a role in doing just that. In the decades since, assets in 401(k) plans have swelled to more than $5 trillion—and the impact is probably double that if you count rollovers to individual retirement accounts.

Now 76, Benna lives on a small farm in rural Pennsylvania, where he and his wife moved 20 years ago to be closer to family and, in the process, “reduce our expenses by probably 50% by relocating from a big house in Philadelphia to a modest ranch-style home,” says Benna, who credits saving in a 401(k) that he established for his company in 1981 with funding his comfortable, if modest, retirement.

He still consults, does occasional speaking engagements, and writes about retirement, including a recent book 401k—Forty Years Later (Xulon Press). Although most of his career has benefited from the 401(k), he does not collect royalties every time a new employee auto-enrolls; he did try, unsuccessfully, to patent the idea. When asked if the 401(k) made him wealthy, he pauses: “Not as wealthy as the Johnsons who live in Boston,” he says, in a reference to the family behind Fidelity Investments, the largest plan administrator.

Benna shared some of his own history—and criticisms—of the 401(k) with Barron’s.

More on the 401(k)

Barron’s: What was your role in creating the 401(k) plan as we know it?

Benna: It wasn’t that this was some paragraph buried in the tax law that no one knew about. I knew, and many others knew; this was passed in 1978. Then, January of 1980 [the effective date] came and went, and we didn’t have people running around all excited about 401(k). It was in the fall of 1980 that I was helping a bank client redesign its retirement program, and I basically fell into this as the potential solution for what they were trying to accomplish. It was a matter of putting some creative pieces together that hadn’t been done before. [Those pieces were that employees could make pretax contributions to cash-deferred plans, and that employers could encourage employees to do so by offering matching benefits.]

There wasn’t anything in the tax code saying that either one of those could be linked in that way, but there also wasn’t anything saying thou shalt not.

What was the initial reaction to the idea of a 401(k)?

We’ll start with my senior partner at Johnson Cos. [a small benefits consulting firm in which Benna was a partner]. When I presented this to him, his immediate reaction was, well, if this is possible, how come the top tax attorneys and major consulting firms haven’t come up with it? And the only answer I could give him was to say, “Hey, I don’t know why they haven’t.”

We also had great difficulty getting media attention for this. Eventually, it started to get a little traction in that regard, and the first significant piece was run in the Philadelphia Inquirer, which then got picked up. The guy who wrote that article got hundreds of calls after it ran, saying, “This is illegal; you can’t do that.”

Beyond that, the next barrier was the fact that employees saving for retirement was a whole new ballgame. It just wasn’t something that was on the rise then. Bethlehem Steel was the first major employer where I ran into this and was told by its human-resources director, “Hey, look. We take care of our employees forever; they don’t need to do anything like that.” [Bethlehem Steel went bankrupt in 2001, and the U.S. Pension Benefit Guaranty Corporation took over its plan, with many employees getting a cut in expected benefits.]

Do you think pensions would have remained popular were it not for the 401(k)?

Pensions would have continued to die regardless of the 401(k). There is a myth that once upon a time everyone had a pension and walked off into retirement and lived comfortably forever. In my first job, I was covered by a pension plan where you had to be 30 if you were male to even become a participant, 35 if you were female, and you had to stay until you were age 60 to get any benefit. That was the good old days.

But you’ve also been critical of 401(k)s.

I’ve been quoted saying I would wipe out the whole thing. Really, what I was referring to was the investment structure, not the 401(k) entirely. I’ve documented the history of these and how participants have been impacted, and it’s not a pretty picture. It went from all fees being paid by the employer to everything getting bundled and dumped on employees.

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You also have a problem with plan complexity, including too many investment options. How much is the right amount?

Definitely, more isn’t better. The first plans typically had two options: a Guaranteed Investment Contract and an equity option, and participants could do 100% in either, split 50/50, or 75/25. And then you went to four, five, six [options], and so on. The primary reason this happened over the years is that employers got pressured [by employees who wanted to add specific mutual funds] into including more and more funds. That’s when employers needed more help managing these choices. Participant costs increased from roughly 0.1% to 1%, and it was easily double that for smaller plans.

I was speaking at an event hosted by a major provider, where their wholesaler was telling advisors, “Hey, this is a great way for you to make more money.” You add advice to this, and you get another 25 basis points on top of what you’re already getting. So what happened was, a potentially low-cost solution for participants simply got embraced by the financial industry when they woke up and realized, ‘Hey, we can use this to add another layer of things and make more money for us and advisors.’ What a tragedy.

More complexity also opens doors for employees to make poor choices. Could target-date funds be the answer to what ails most plans?

Had that type of structure been available back at the beginning when this whole thing started, that would have been the way to go. Rather than attempting to create huge portfolios that have the kind of diversity recommended, and expecting participants to apply that on their own, these take the decision out of it.

That said, target maturity funds have been grossly mishandled in 401(k) plans because they’ve been allowed to be added as if they were just another fund. Plans need to be structured so that somebody who selects one of those funds can’t select any other funds. The benefits go away if you put 10% of assets in a target-date fund and 90% spread among a bunch of other funds.

Also, I don’t think they’re the answer for people who are close to retirement, or in retirement today, because I believe they represent a lot more investment risk.

If you had carte blanche to improve the 401(k) system, what would you do?

I would start by requiring that all employers who have a certain number of employees, whether that be five, 10, or whatever, to offer some form of payroll-deduction retirement program. In many instances, that’s not a 401(k). Employers that have a plan should be required to do automatic enrollment, and the next part of that is automatically increasing employees’ contribution rates on an annual basis to get them up to a certain contribution level.

Another significant issue is what is referred to as leakage—that too much money escapes the system when people change jobs. So, I would eliminate withdrawals when those events happen. The money has to stay either in a 401(k) or an IRA until retirement. I would also eliminate lump-sum options when people retire. Maybe allow 10% when you retire to be withdrawn initially, but beyond that, annuitize it so you take it as an income spread across your lifetime.

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